Corporate Citizen, Global Target: The U.S.-China Trade Dispute Introduces Firm-Specific Pressure

In recent decades, prevailing wisdom in corporate governance academia – and even the consumer marketplace – has urged the evolution of the corporation’s singular focus on profit maximization to a more integrated, citizen-like involvement in the broader social and political ecosystem. Concurrently, the global economy, increasingly connected by high-speed financial markets and advances in technology, has made historically rigid trade borders seemingly obsolete. The forces of globalism and corporate citizenship are undoubtedly related: reduced barriers to trade made truly multi-national businesses a possibility, and the increased involvement of corporate multi-nationals in the social and political affairs of their host countries supported a widely-held free trade consensus.

Of course, the last ten years have charted a different course. The 2008 financial crisis and the ensuing slow recovery preceded a political retreat from corporate integration and free trade. In particular, under President Trump’s leadership, the United States has bucked the status quo laissez-faire approach to global trade by imposing tariffs on China to combat what the U.S. describes as its unfair trade practices. Since 2018, the U.S. and China have imposed hundreds of billions of dollars in tariffs on one another in a trade war that continues to escalate to this day. This departure from the free-trade consensus has not gone without controversy. The tit-for-tat tariffs and trade barriers enacted by the two global powers have generated considerable debate in the media, but less discussed is a novel tool gaining favor among policymakers: the targeting of specific companies.

Measures targeting individual companies include facially neutral but specific-in-effect tariffs, enhanced regulatory scrutiny, and perhaps most striking - the imposition of sanctions on specifically named companies. While these measures might appear as merely an escalation in an increasingly bitter trade war, evidence suggests they are not unique to the U.S.-China trade war - hinting perhaps at a broader counter-punch against the corporate citizen consensus at the turn-of-the-century. If so, increased firm-specific pressure should alarm corporate executives and free-trade acolytes alike. Amidst the recent global populist tilt, targeting specific companies will likely be an increasingly tantalizing option for policymakers because it has the dual feature of protecting domestic industries whilst stoking nationalist fervor. However, there are two critical defects to this tool. First, facing increased political risk, firms may decrease cross-border investment and integration, reducing the surplus benefits of scale and second, the employment of firm-specific measures amidst trade disputes may decrease the credibility of important regulation with genuine public policy considerations. These defects – to both practicality and credibility – will require enhanced political sensitivity in the boardroom and perhaps a more delicate touch by policymakers; to the extent that firm-specific pressure is employed, the scalpel is more apt than the hammer.

While U.S.-China trade relations have been tenuous for decades, tensions escalated with the imposition of billions of dollars in tariffs between the two countries beginning in 2018. Concurrently, the U.S. raised alarm over the Chinese government’s entrenchment within major Chinese telecommunications and technology companies. China had invested billions of dollars in telecom tech, particularly in ZTE and Huawei – companies that are working hard to build a global communications network and gain a foothold in the consumer electronics market. Amidst increasing trade tensions, the U.S. and other countries voiced concerns that these two companies were violating sanctions against Iran. U.S. criticism of these companies escalated as government officials worried publicly that Huawei’s growing global 5G network would lay the groundwork for Chinese surveillance capabilities. Accordingly, the U.S. began imposing restrictions prohibiting the use of ZTE and Huawei equipment by the U.S. government, but later expanded restrictions to prohibit even private U.S. companies from working with Huawei without government approval. Pressure on Huawei even led to the arrest of the company’s CFO, Meng Wanzhou, over sanctions violations in late 2018 while she was in Canada.

While China’s dominion over its telecom industry indeed raises concerns over Huawei’s growing influence in the global communications market, it is difficult to separate the U.S.’s actions from the broader trade context. These company-specific measures were enacted during the ongoing tariff tit-for-tat between the U.S. and China; the effects will likely sharply limit Huawei’s ability to achieve market dominance in the telecom space. Yet at the same time, Huawei was outpacing U.S. technology companies as it developed the next generation 5G network; disrupting the global technology exchange may reduce the speed and efficiency with which future advancements are made. For its part, China has threatened to retaliate with more targeted measures against U.S. companies at a time where Silicon Valley continues to make investments in Asian consumer markets. Having already made significant capital investments to achieve scale abroad, U.S. companies are now facing enhanced political risk that might reduce gains to trade and hamper future capital expenditures. Should the dispute continue to escalate, company-specific measures might become more prevalent, introducing political uncertainty that is disruptive to growth plans in the corporate boardroom.

This is not to say that company-specific measures are never appropriate; tailored measures can more acutely target specific offenders without creating the broader economic ripples engendered by less precise, industry-wide tariffs. In light of the very real questions posed by the Chinese government’s involvement with Huawei’s global communications network, it is easy to see why such pressure was employed. However, context matters, and the use of such measures amidst the ongoing trade dispute could undermine the credibility of the U.S.’s legitimate national security concerns. President Trump himself has even indicated that despite the U.S.’s worries about Huawei, he is open to negotiating Huawei’s status in exchange for concessions from China on trade policies. This is perhaps the broader risk for the rise of firm-based pressure – to blur public interest with the private, simultaneously undermining both the global market system and the public actors tasked with its prudent regulation. Such concerns are not limited to the U.S.-China trade war: when Japanese officials arrested Nissan Motors CEO Carlos Ghosn in late 2018 on charges of alleged financial impropriety, some speculated that his arrest was in part motivated by Japanese concerns that Ghosn was driving the Japanese Nissan’s merger with the French automaker Renault. Should public power continue to be employed to affect acute, specific private interests with international implications, credibility issues will continue to arise.

Still, others might not see fault with this rising populist streak. While the benefits of corporate citizenship and global integration are no doubt substantial in absolute economic terms, the distributive benefits are more dubious. Have corporate multinationals, by availing themselves of the social and political levers of domestic and international bodies, opened the door to enhanced scrutiny? That is to say, has the rise of corporate citizenship, along with the associated prestige and influence afforded to international businesses changed the calculus for the hands-off status quo? These implications are even broader than the short-term practical effect of the U.S.’s Huawei efforts; they seem perhaps indicative of a broader sea-change against the liberalized treatment of cross-border business. And although the trade dispute between the U.S. and China may be cooling amid fears of a global economic slowdown, the effect of such firm-specific measures to introduce enhanced political risk into firm investment analysis might continue long after short-term tariffs are removed.

Ali N. Habhab graduated from the University of Michigan in 2017 with a degree in Business. He was Editor-in-Chief of the Michigan Journal of International Affairs from 2016-2017. Ali is in his third year at the University of Michigan Law School.

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